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    Facing a mid-life financial crisis? Here are 6 ways to get out of it

    Synopsis

    6 remedies for mid-lifers who are stuck in a financial quagmire, and how to avoid it in the first place.

    crisis2-gettyGetty Images
    If starting afresh in middle years, the amount of savings required to pursue the target corpus can seem daunting.
    After working for 18 years as an IT professional, one would have expected Pankaj Kalra, 48, to have a sizeable nest egg kept away. Instead, Delhi-based Kalra has barely Rs 3.5 lakh in savings, that too accumulated over the past 2-3 years. He lost Rs 10 lakh in a failed business venture and another Rs 12 lakh went in meeting household expenses when he was not working. While the thumb rule states says he should have had four times his annual income in savings by now, Kalra has barely 20%. “Right in the middle of my life, I realised I had no concrete plans and had not put aside any savings,” Kalra recounts.

    Life, they say, begins at 40. But like Kalra, there are many who lose their footing in their middle years—perhaps the most remunerative period in one’s working life. At a time when one should be getting financially stronger, some sleepwalk into a money tangle after years of overspending, bingeing on debt or indulging in exotic investments.

    Others get waylaid by circumstances, such as a prolonged illness, loss of job or partner, business setback or even a matrimonial tangle. Irrespective of the ordeal, getting finances back on track in one’s 40s or early 50s can be tricky with limited working years ahead. If you don’t start securing your financial future soon, you will find that much time is already lost. You need to kick-start the savings cycle afresh to get back on the path towards financial independence.

    In this feature, we outline some remedies for those mid-lifers who are stuck in a financial quagmire. We also suggest some pointers to help others avoid landing in a soup in the first place.

    • Genesis of a financial crisis
    Financial planners say most mid-life financial crises are precipitated by procrastination or lack of aggressive savings. Too often, individuals put off investments for later years. “The seeds of mid-life financial strife are usually sown in the early years,” observes Amol Joshi, Founder, PlanRupee Investment Services. In the initial years, there is a belief that enough time is at hand to think of long-term goals like retirement.

    What can lead to a mid-life financial crisis?
    mid-life-financial-crisis


    “Many individuals start investing much later in life, assuming time is on their side,” says Hemant Rustagi, CEO, Wiseinvest Advisors. Another reason for putting off savings is high optimism about future earnings.

    Kalra fell into a similar trap, eventually realising that there was a huge gap between what he expected to earn and what he was actually earning. This forced him to start his own venture, which turned belly up within a few years. “When starting out, there is a tendency to overestimate earnings potential and underestimate expenses,” points out Prableen Bajpai, Founder and Managing Partner, Finfix Research & Analytics.

    Delay in savings makes it harder to reach goal
    delay-in-savings

    Putting off investing for later can be harmful. At times, income growth may not materialise to the extent you expect. At the same time, inflation would be at work to pull down the worth of your savings every year. The choice of investments also determines what shape your finances take.

    Overdependence on conservative, tax-inefficient investment avenues like bank fixed deposits will not allow your savings to survive inflation. Investors who take some exposure to equity from an early age are usually better off. Expensive indulgences like real estate in the early years also has a harmful effect. Apart from being illiquid, investment in property—for other than own use—is sub-optimal, given the poor rental yields. “Ultimately, your investments should be able to beat inflation on post-tax basis. Otherwise, your savings are losing purchasing power,” argues Joshi.

    Start small, but hike outgo later to reach target
    hike-money-later

    Mid-life crisis may also be precipitated by having no direction for your savings. If you don’t have a defined purpose for your savings, it is vulnerable to being swallowed up. The tendency to club investments into one pool is another reason investors panic when goals come due.

    Most individuals lump all savings into a single basket. All accumulated investments are usually treated as one big money pot from which to withdraw as and when the need arises. This opens up the risk of overdrawing funds for the nearest goal, leaving much less for goals to come. But if every rupee has a defined purpose, it allows you to be disciplined in withdrawals. Having a system in place also prevents you from reacting adversely to changes in market conditions. Says Rustagi, “When investments are linked to goals, it makes you focused. One is mentally prepared to deal with volatility so that abrupt decisions based on prevailing market conditions can be controlled.”

    Finding a way out
    • Rebuild emergency corpus
    If you are fire-fighting a mid-life financial crisis, chances are you have drained your emergency savings as well—if you had any in the first place. Your first task should be to rebuild the contingency fund. Without this buffer, you will dip into your retirement savings or take on additional debt to tackle the next crisis.

    Tarun Birani, Founder and Director of TBNG Capital Advisors, says, “Any financial plan starts with creating an emergency corpus. The entire process can go much smoother if you have that buffer in place.” Ensure that you keep aside at least three-four months’ worth of expenses as contingency. You can rebuild this buffer gradually, over a span of 6-12 months. This amount can be kept aside in a mix of sweep-in FD and liquid funds. Ensure it covers all regular expenses such as food, rent, loan EMI, tuition fees, electricity and gas etc.

    How to rebuild an emergency fund
    emergency-corpus


    • Rework the household budget
    If you are stuck in a financial quagmire, your immediate priority should be to trim the household budget. Cut the discretionary spends that purely serve to maintain a lifestyle. “Go through the spending pattern and identify areas where spending can be curbed,” stresses Bajpai. Movie nights, dining out and weekend getaways will have to be cut back. The Netflix subscription may have to be snipped. Keep the credit card locked up when you go to the mall and try to make purchases with cash. This will automatically curb your propensity to spend.

    If you are shelling out hefty premiums on traditional policies, weed them out. Kalpesh Ashar, Founder, Full Circle Financial Planners and Advisors, says, “Many individuals are paying through the nose for low-yield traditional plans that put a strain on cash flows.” A pure term plan is the only form of insurance individuals should consider as risk cover, say planners.

    • Get a handle on debt
    A big contributing factor to financial strife in mid-years is piling debt. If you have borrowed willy-nilly, beyond what your income supports, chances are that loan EMIs are eating away a chunk of your savings. Till the time you continue to service these expensive loans, financial goals will remain out of reach. Get out of the debt overhang at the earliest. “Getting out of debt quickly should be first priority when rebuilding finances. Once you have cleared expensive debts, it will allow room to commit to financial goals,” asserts Joshi.

    Target expensive, high interest loans. Pay the maximum you can afford towards the high-cost loan without jeopardising the repayment of other loans. If starved of funds, liquidate existing investments that are fetching far less than the interest you are shelling out. Once you have cleared the costly debt, move to the next one. This will bring down the interest burden substantially.

    Credit card debt is the most expensive, if you are prone to rolling over the dues. You end up paying up to 3-3.6% in charges on the outstanding balance, which adds up to a hefty 36-44% interest for the year. If you have run up a huge credit card bill and are unable to pay it at one go, ask the credit card company to convert your dues into EMIs. Most companies are willing to let customers pay down large balances in 6-12 EMIs.

    Which loan should you repay first?
    loan-repayment


    While prioritising debt repayments, consider tax benefits on some loans that bring down the effective cost for the borrower. For instance, interest paid on an education loan is fully tax deductible. Similarly, tax benefits on both principal repayment and interest outgo bring down the cost of a home loan. Personal loans, vehicle loans and credit card debt, on the other hand, offer no tax relief.

    • Provide for liquidity
    Coming out of a savings crunch, one of the immediate concerns would be to provide for liquidity needs. When faced with a job loss or extended illness, for instance, catering to day-to-day expenses can be a concern. Rustagi suggests setting up a systematic withdrawal plan (SWP) from a debt fund to take away the burden of immediate needs.

    Under SWP, a fixed sum can be taken out every month, even as the principal keeps fetching a healthy yield. In tight situations, you may even tap the accumulated corpus in your PPF or PF account to generate an income stream. After 5 financial years from account opening, you can withdraw up to 50% of the PPF account balance as at the end of the preceding financial year. PF corpus can be withdrawn prematurely for specific reasons like job loss or a medical emergency.

    Downsizing can provide some relief in a crunch situation. Chennai resident A. Mohan, now 60, found himself in a tight spot when he was cheated out of his inheritance in his fifties by an unscrupulous broker. He had to sell his house due to the losses. The episode led to much emotional stress and affected his health.

    With savings running out, Mohan approached a financial adviser. To create liquidity as also safeguard the residual investment, the expert reconstituted the portfolio and advised him to sell his apartment and move to a smaller house. From the savings, the adviser stitched together a fixed income portfolio that yielded around Rs 25,000 a month to meet liquidity needs.

    • Identify and prioritise goals
    Before beginning the investment process, outline the purpose behind each rupee outgo, insist planners. Without this, you may lose your way again. “Identifying investments is secondary. First define clear goals and quantify them,” asserts Birani. It may be prudent to prioritise certain non-negotiable goals like children’s education and own retirement. Certain goals may have to be diluted or even pushed behind indefinitely, so as not to compromise on more critical goals.

    Put off the purchase of that dream home for some more time if not a necessity. Rethink the size of that planned wedding for your son or daughter. “Giving priority to your own retirement is actually doing your children a huge favour as you are less likely to be a financial burden on them later,” asserts Joshi. He insists that retirement should be the second priority for mid-lifers— only behind clearing expensive debt.

    • Start from scratch
    Starting savings afresh may seem like a daunting task at this age. But it is critical that you regain control to give yourself the platform to achieve financial stability. Start by accepting the reality of the situation. “Many individuals who experience some financial setback display a ‘once bitten, twice shy’ type of aversion,” points out Bajpai. “Even if they have the capability to invest, their risk tolerance drops considerably.”

    However, financial planners emphasize that the longer you delay your savings at this point, more difficult it will be to get anywhere close to your financial goals. Putting your money to work at the earliest is key to achieving your target. This is critical as you have limited amount of time in which to get in shape. If you are in your 50s, you should be less adventurous with your money, and not take extra risks. But in the middle years, you still have plenty of time on hand to have some aggression in portfolio. “You can still take equity exposure in moderation through mutual funds to allow for building a meaningful corpus,” asserts Ashar.

    If starting afresh in middle years, the amount of savings required to pursue the target corpus can seem daunting. Cobbling together a meaningful amount is difficult for those faced with limited savings or weak income stream. Planners insist that you don’t need to start investing the entire sum today. Even if you start with a lower sum now, and hike the outgo gradually, you will eventually come reasonably close to your target.

    When Kalra found himself backed into a corner after losing his savings, he was completely shorn of confidence. Even when he approached a financial planner for help, he remained skeptical about commiting any amount on a monthly basis. Landing a job after one and a half years, he could somehow support his day to day expenses, but not leave much on the table. So the adviser kept the plan very conservative and let him come forward with surplus savings whenever he could.

    Starting off gradually by investing in balanced advantage and low duration funds, Kalra could see that his money was growing steadily. Reverting to the savings path, albeit tentatively, gave him the confidence to pick up pace of investing. After a year and half, he had even started to commit a small amount on a monthly basis via SIP. Kalra is more relaxed about his prospects today, knowing that he is chipping away at his goals.

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    (Your legal guide on estate planning, inheritance, will and more.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

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